Is gold a good investment?

Aunt Pecunia, our resident financial guru, loves to answer questions about money from SMMs and wanted to pass on this particular query. One SMM emailed to say she heard a discussion about gold on the radio and wanted to know Aunt P’s view on the shiny yellow stuff as an investment.

Aunt P is, of course, not an authorised financial adviser. However, she has gathered quite a lot of experience of money matters over the years and she tells me that investing in gold is not as clear-cut as it seems.

Gold has been around for centuries and is seen as a “safe haven” in times of turmoil. What with the US and North Korea trading nuclear threats and Spain about to break apart, nowadays might just qualify, even though (as yet) there is no stock market meltdown. Probably because of those factors, although demand for gold jewellery in India and China also has an impact, the gold price has been quite strong recently. Aunt P has some charts showing that, some of the time, gold can outpace returns from shares or property. But, depending on the period you select, it’s not always the case. Anyone remember when former chancellor Gordon Brown sold off the UK’s gold reserves? He began the process in July 1999 when the gold price was $256.20. By September 2011, it had recovered to peak at $1,781. (Glad that wasn’t me doing the selling.)

The important thing to remember about gold is that it pays no income. There is no yearly dividend (like a share) or savings interest or even rent from a property. You are relying solely on the capital value to go up. Just to make things trickier, gold is priced in US dollars which is great if the pound is strong and you get lots of dollars for your sterling. However, if the gold price is weak and so is the pound, it’s a double hit to your investment.

Lastly there’s a practical problem: storing it. Your knicker drawer may not be the most secure home for a stash of gold bars and putting it in the equivalent of Fort Knox is going to cost a pretty penny.

Naturally, there are ways around the logistics. The Royal Mint sells gold bullion and will send it to you or keep it for you (at a price). You could also buy shares in a gold mining company, as it will benefit hugely from a rise in the underlying gold price, or a fund which invests in mining firms, such as BlackRock Gold & General. Another way is to invest in a gold ETF (exchange-traded fund). This is again buying shares, this time in ‘synthetic’ gold which just follows the ups and downs of the price of real gold.

If Gordon Brown had hung on, he could’ve made quite a lot of money. For sophisticated investors then, gold can be worth a punt as a small part of a large portfolio. However, for most of us, Aunt P suggests sticking to jewellery.

See the SMM guide to alternative investments including wine and art here.